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European bank rescues risky terrain for Gulf SWFs

European bank rescues risky terrain for Gulf SWFs

Gulf sovereign wealth funds may be tempted to make a quick injection into failing European banks but Una Galani hopes they’ve learned from their mistakes in 2007.

September 24, 2011 5:39 by

European bank rescues are risky terrain for Gulf sovereign wealth funds. It feels like 2007 all over again in the banking sector. Valuations are rock bottom and institutions are scouring the Gulf for capital. But the track record of the region’s sovereign funds is mixed. And some portfolios are already bulging with financials.

Appetite for sovereign funds to bail out Europe’s banks will be diminished in light of higher domestic spending and foreign aid pledges by Gulf governments in the wake of the Arab Spring.

That means the bar for opportunistic investments by the likes of Qatar, Abu Dhabi, Kuwait, and even Saudi companies, will be higher. And any investments, likely to be smaller than the $5 billion to $10 billion punts seen before.

Existing exposure to financials will also weigh. Take Qatar. Its current holdings in the UK’s Barclays , Credit Suisse, Agricultural Bank of China , Santander Brasil and a newly-created Greek bank may amount to roughly $10 billion. That is equivalent to anything between 10 percent and 17 percent of its estimated $60 billion to $100 billion of sovereign funds under management — and a large concentration of risk.

If sovereign wealth funds can’t resist the temptation to earn a quick buck like Qatar and Abu Dhabi did with Barclays, at least they can learn from past. Abu Dhabi’s disastrous investment into Citigroup in 2007 provides a good lesson in what not to do. The emirate’s SWF led the first big emergency injection into Western banks, failed to build sufficient downside protection, and was then later stung in the US bailout of the bank. Abu Dhabi has since accused Citi of fraud alleging $4 billion of losses relating to the $7.5 billion investment.

To insure maximum protection, sovereign funds should seek a board seat, build in at least 50 percent downside protection, secure a double-digit dividend, and create a structure that insulates the investment from any subsequent bailouts.

Sovereign funds could also follow the Qatari model and use…


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